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Dropping Health Plans, to Pick Better Coverage

Steve Hooper, of the Health Economics Group, a company that manages corporate benefit plans, says most of his employees have incomes low enough to receive federal subsidies.Credit
Brendan Bannon for The New York Times

For nearly 20 years, Keith Perkins offered health insurance to employees of his small electrical contracting company in Greencastle, Pa., and footed most of the bill. This year, with the arrival of the Affordable Care Act’s insurance marketplace, he decided to stop.

Mr. Perkins, who is 54, did the math and calculated that most of his employees, who are spread across Maryland, West Virginia and Pennsylvania, would come out ahead if he dropped his group policy and let them buy insurance individually through the new federal and state exchanges.

He knew the move would be unpopular with some employees, but he was tired of trying to choose one plan every year to cover all of their diverse needs.

“Some of my guys are on the lower end of the wage scale,” said Mr. Perkins, who typically has 10 to 18 employees. “When I did the subsidy calculator, I realized many of them would actually be better off if we didn’t offer coverage. We took the amount of money we were paying for health insurance and dumped it into their paychecks instead. And this way, they get to make the choice, not me.”

America’s smallest employers, those with fewer than 50 workers, are not required under the Affordable Care Act to offer insurance or contribute to their employees’ health care costs. As a result, some companies, seeing that their employees now have attractive options at Healthcare.gov, are seizing the opportunity to wash their hands of one of their most expensive business problems.

“It’s a question we get every single day,” said Thomas Harte, an insurance broker with Landmark Benefits in Hampstead, N.H. “Employers are seriously considering walking away from their plans.”

The decline in the number of small businesses offering health insurance began long before the new law. In 2011, 38 percent of American companies with fewer than 50 workers provided health insurance, down from 47 percent a decade earlier, according to a study by the Robert Wood Johnson Foundation.

It is too early to say how the Affordable Care Act will affect that trend, but health insurance has long been a headache for small businesses. Their policies are typically more expensive than comparable plans available to larger employers, and because the risk pool of participants is tiny, one sick employee can increase a group’s premiums sharply.

Nancy Smith, 62, struggles every year to find affordable coverage for herself and for three employees at the Great Arizona Puppet Theater, an arts organization in Phoenix. When one employee developed diabetes several years ago, the group’s annual premiums rose 100 percent. That prompted Ms. Smith, chief executive and artistic director, to cut costs by switching to a bare-bones plan offering catastrophic coverage with a high deductible.

Now, though, that plan is being canceled because it does not meet the new law’s minimum standards, so she intends to sit down with her employees to shop on Healthcare.gov for individual coverage. She put off looking while the site’s technical problems were being addressed, but she likes what she has seen. “It looks like we’re all going to get better coverage and save money in the long run,” she said.

Kelly Fristoe, an insurance broker in Wichita Falls, Tex., estimates that the employees at nearly half of his small-group clients would be better off if the companies dropped their coverage, gave some of the savings directly to the workers and let them shop for their own insurance. Four clients have already decided to do that for 2014.

Steve Hooper, president of the Health Economics Group, a Rochester, N.Y., company that manages corporate benefit plans, said many of the workers in his region, including most of his own employees, have incomes low enough to qualify for the federal subsidies available to those who earn up to four times the federal poverty level, about $46,000 annually.

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A self-described data fanatic, Mr. Hooper, 74, spent months studying the law’s nuances and exploring various situations for his 25-person business. He knew what he paid his employees, but he did not know their overall household incomes. So he created a staff survey and arranged meetings with his employees to discuss their individual situations.

It became clear that many, especially those with children, would be better off without the option of buying company-sponsored insurance. Employees who have access to an “affordable” employer plan can buy a plan instead through the exchanges if they choose, but they cannot collect any subsidy that they would otherwise be eligible for. And those with children face an extra pitfall: The law’s calculation of “affordable” does not take into account the cost of adding dependents to the employer’s plan.

In 2013, to insure 11 workers, Mr. Hooper’s company contributed $283 a month for each employee toward health care premiums, covering more than 80 percent of the cost for an individual. Employees paid an additional $55 a month, or more if they needed coverage for dependents. For 2014, Mr. Hooper is taking the $30,000 to $40,000 he will save by canceling the group’s plan and using it to fund flexible spending accounts for each employee.

So far, he said, only one person is facing higher premiums, and he plans to add extra money to her flexible spending account to fill the gap. And while his company’s old plan carried a $2,500 annual deductible, he said the typical deductibles on his employees’ new plans range from zero, for those who qualify for Medicaid, to $2,000.

Taxes, however, are a concern. Workers on an employer-sponsored plan pay their share of their monthly premium with pretax dollars. Plans bought through the exchanges are paid for with after-tax wages, which can add significantly to the cost born by employees. But Mr. Hooper said the combination of subsidies and lower deductibles would still reduce overall spending on health care for nearly all of his employees.

“When you do the math,” he said, “it’s pretty clear that in our particular case, everyone is going to benefit if we get out of the insurance business.”

Paul Hamborg isn’t sure. Mr. Hamborg is trying to decide whether his company, Enrollment Research, a consulting firm based in San Antonio, should renew its group insurance in 2014. None of the company’s five employees would qualify for subsidies individually, and he is weighing the advantages of switching to individual coverage — more choice for his employees, less administrative overhead for him — against the increased tax bills for them. That issue, said Mr. Hamborg, who is 40, “is the one thing about the Affordable Care Act that’s a real disappointment, from my standpoint.”

Brokers say they expect 2014 to be a wait-and-see year in the small-business market. Many carriers offered early renewal options this year, and a lot of businesses took advantage of them to buy time while the new system gets off the ground.

Mr. Harte, the insurance broker in New Hampshire, said many of his customers were exploring dropping insurance, but tentatively — in part because they worry that it would look bad even if their employees came out ahead. “Most employers don’t want to be the first one to cancel their health insurance coverage within their competitive marketplace,” he said.

Mr. Perkins, the electrical contractor, acknowledges that dropping the benefit had its costs. Some employees are now paying more for coverage, and some have quit.

“At least part of the reason they left was the lack of health insurance here now,” he said, adding, “We have also hired seven new employees this year and didn’t have a problem finding them.”

In the end, he said, the financial savings and the administrative savings were worth it.

A version of this article appears in print on December 12, 2013, on Page B1 of the New York edition with the headline: Dropping Health Plans, To Pick Better Coverage. Order Reprints|Today's Paper|Subscribe